Budget 2015 underwhelming

Budget 2015 underwhelming

In an interview with CBN, Peter Worthington, Senior Economist at Absa said he found the 2015 budget underwhelming, “It wasn’t terrible, but it certainly wasn’t a sterling piece of fiscal genius.” He went on to unpack factors that he felt would affect business in this budget period.

The biggest cost increase was the petrol tax hike, with a whopping increase of around 80c per litre, this will affect business production costs across the board, especially the transportation and logistics sectors. 

The unemployment insurance fund contribution holiday is however a fairly substantial giveback to the economy. It is worth around R15bn in total, with half going to consumers and half to business.

There was a nod to SMEs (Small- to Medium-sized Enterprises) with the government wanting to create the desired operation environment for these businesses.

Tax wise, South Africa’s corporate tax regime sits at around 28%. Although this is not the highest in the world, it does sit in the upper regions, and many South African businesses may argue that the corporate tax rates should be reduced.

“Treasury would respond to this by saying that – at least for multi-nationals – there is a lot of tax avoidance (which is legal) that allows them to shift profits to lower tax jurisdictions. The Davis Tax Commission has pointed to this happening, although it is very difficult to say how much it is, and no corrective measures could be put in place in the very short-term, as it is a problem with international conventions and had to be done with other countries,” Worthington points out.

Businesses should also be watching the carbon tax that is due to be implemented sometime next year. The first draft was perceived by heavy industry as being particularly onerous. 

“It is currently being redrafted so business should engage in that process to ensure we get a carbon tax that is optimal; that is balanced between discouraging carbon emissions without being a lethal blow to companies.” 

The labour market and electricity costs would affect manufacturers especially, but although these issues were mentioned in the budget, no solutions were put forward.

Worthington went on to say that we are on a very slippery debt dynamic slope. Every year we have deficits that are large enough that we see a steady increases in the debt-to-GDP ratio, but every year the treasury pushes out the year consolidation to the last year in the three-year forecast.

“They did it this time around again and, if I were the finance minister, I would have been a bit more aggressive in the expenditure cuts and the net revenue measures so that we could have actually seen the debt-to-GDP ratio clearly stabilise. At the moment it’s plateauing, but there is no sign it has actually peaked.”

He also felt that the Eskom bailout scheme was too light on detail.

“I understand treasury’s argument that they couldn’t disclose any details as it was at a financially sensitive point in the transaction, but none the less more detail on the asset sales programme was needed. As it stands it looks like the asset sales are going to be very narrowly restricted and used to bail out Eskom, but there is probably a scope to go wider, given how many state-owned enterprises we have and how badly many of them are managed.”

He goes on to say, “In terms of expenditure cuts, these might impact on things such as public sector employment [therefore the minister was cautious in his approach.] If he had been more aggressive with these cuts, public sector unions would definitely have something to say about that.”

On the why we didn’t see the expected VAT increase: “We have a situation on South Africa where a fairly small proportion of the population provides much of the tax revenue to personal income tax. There is a limited scope for increasing it in an aggressive way. This is the case for corporate income tax too – given that the rate is fairly high. Also it is particularly politically unpalatable to increase VAT.”

Worthington concludes, “I find it very interesting how the rating agencies have taken divergent views out of the budget. Some said it was reassuring and that fiscal policy was on the right track, whereas others said the policy has a number of remaining challenges and it is more likely than not that South Africa will be downgraded.”

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